May 4, 1987
Summary
Reports on activity in the Seventh District generally indicate
further expansion. An exception is the auto industry, where lagging
car sales have led to production cuts and layoffs. Truck sales are
ahead of last year. Purchasing mangers report further expansion.
Steel markets have been stronger than expected. Most lines of
capital goods remain slow. Nonresidential construction has been at
good levels in the District, but some slowing in commercial work is
reported in the Chicago suburbs. Residential building and sales
continue strong. Paperboard shipments from Midwest mills have been
above expectations, probably due partly to inventory building.
Apparent slowness in March sales at a large retail chain store were
attributed to the late Easter. Returns to District crop and
livestock farmers have improved, and the five-year downtrend in
farmland values shows signs of bottoming.
Motor Vehicles
Sales of domestic-model cars have continued below a year earlier,
and production plans have been adjusted downward in response.
Production cuts are concentrated among long-time domestic
automakers, and are being accomplished in part by layoffs at some
District plants. Temporary and permanent layoffs by automakers are
particularly a concern in southeast Michigan where the industry is
heavily concentrated. Assemblies are sharply higher at U.S. plants
of foreign producers located outside the District. Truck sales have
been strong, and forecasts for total truck sales this year have been
revised up. Industry analysts expect production of heavy trucks in
1987 to exceed 1986 by 5-10 percent.
Purchasing Managers
Chicago and Milwaukee purchasing managers report rising activity
this year through March. Production orders, backlogs, and
inventories have risen. Lead times have lengthened. Expanding
activity has been accompanied by continuation of the price increases
which began last fall.
Steel
Demand for steel in the second quarter has been stronger than
analysts anticipated early in the year. USX's gradual return from a
six-month work stoppage was expected to put downward pressure on
steel prices. This is not occurring. Rebuilding of inventories and
reduced imports are thought to be important factors in the strength
of steel demand. District producers of sheet steel are operating at
around capacity. Bookings for the third quarter are not showing the
usual seasonal downturn. Auto industry demand is holding up well
despite softness in sales. Buying by appliance makers has increased.
Steel service center business is strong. Demand for steel used in
gas pipelines is strong. Orders are also up for steel used in oil
and gas drilling and railcars, lines in which demand had been very
low.
Capital Goods
A producer of a variety of industrial products reported that
activity is flat to down. Demand for castings remained slow. Markets
for food service and commercial refrigeration equipment were held
down in part by the ample availability of used equipment. A District
producer of railroad locomotives, which had planned recalls of laid-off workers if orders picked up, changed the status of 1,200 on
layoff from temporary to indefinite. A large farm equipment maker is
paring its salaried work force by a further 5-6%, following huge
cuts earlier, in an effort to return to profitability even if demand
stays depressed. Aircraft components, both civilian and military,
are in strong demand.
Nonresidential Construction
The pace of nonresidential construction in the District has been
ahead of the U.S. in 1987. Contracts (floor area) in the five states
were 6% above last year for two months, versus a 12% decline
nationwide. Construction steel fabricators reportedly are busy in
several Midwestern states. A large amount of work is underway in
downtown Chicago, with more announcements expected, but some
softening is reported in the suburbs. Ready-mix concrete prices have
fallen, attributed partly to the mild winter which allowed projects
to be finished months ahead of schedule.
Residential Construction and Sales
Home construction and sales remain strong in the District. However,
the jump in mortgage interest rates in April may dampen activity.
Chicago-area quotes on 30-year fixed-rate mortgages vary widely,
from around 9.5 percent up to 10.75 percent. A month ago, 8.75
percent was common. A large Chicago-area realtor reports that the
number of its residential sales transactions in March was the second
highest ever, below record 1986.
Paperboard
Paperboard shipments in 1987 have exceeded expectations. For 2
months, shipments from mills in the North Central states were 3%
above a year earlier. Based on a District company's experience,
March data for the industry are expected to show another increase.
Strength is attributed in part to increased inventories of finished
appliances and nondurables in boxes. Brown paper mills are operating
near capacity. Producers have announced price increases averaging 9
percent.
Retailing
A contact with a large District chain store reports that March sales
were weak, except when special incentives were offered, but April is
expected to be well above a year earlier because of this year's late
Easter shopping season. Some orders have been shifted from Japanese
to other Asian suppliers in response to the high value of the yen,
but this shift is "glacial" because of long-term contracts.
Agriculture
Conditions are improving in the District's deeply distressed farm
sector. Corn and soybean prices have edged higher because of
unexpected strength in exports and domestic consumption, and
indications that farmers intend to cut 1987 crop acreage more than
had been expected. A survey of planting intentions indicates that
District farmers plan cuts of 13 percent in corn acreage and 4.5
percent for soybeans. Livestock producers continue to fare well,
aided recently by seasonal increases in hog and cattle prices. In
marked contrast to the downtrend of the past five years, District
farmland values, on average, held steady in the first quarter.
Modest first-quarter gains ranging from a half to one percent in
Illinois, Iowa, and Michigan were about offset by declines of 1
percent in Indiana and Wisconsin. Farm real estate activity is up
from a year ago in all District states.